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PRA publishes dear CEO letter on reserving

On 2 December 2014, the PRA published the text of a Dear CEO letter sent by Chris Moulder, the PRA’s Director of General Insurance, reminding PRA regulated general insurance firms and their board members of their responsibilities to set adequate technical provisions to comply with Prudential sourcebook for Insurers (INSPRU) 1.1.12R, and setting out the PRA’s expectations of firms in this area.

Mr Moulder says that the PRA requires firms to set adequate technical provisions in order to comply with INSPRU 1.1.12R. In so doing, it expects general insurers to have a robust approach to the setting of reserves and to put in place appropriate and adequate oversight of reserving processes. The letter lists a number of matters that the PRA expects general insurers, and their boards, to pay attention to.

The letter also details the PRA’s approach to reviewing firms’ reserving processes and reserve levels. Mr Moulder says that under the current regime, the PRA considers reserve adequacy at the firm level, and reserves from prior years have, in some cases, been used by firms to offset poor underwriting year/accident year results. However, the PRA will question the robustness of the underwriting practices at firms that rely unduly on prior year reserve releases to support on-going underwriting activity for any substantial period of time. Mr Moulder then sets out some of the ways that the PRA seeks to assess the adequacy of reserving governance and reserve levels within general insurers.

Mr Moulder continues that, given the pressures on firms' performance caused by current market conditions, firms should be aware that the PRA is placing increased emphasis at present on gaining assurance over firms' reserving. As part of regular supervisory interactions, firms should be ready to demonstrate the robustness of their reserving governance frameworks, and the adequacy of reserve levels. Firms should expect supervisors to make use of some or all of the tools outlined in the letter to provide the PRA with assurance in this area.

Mr Moulder ends his letter by saying that under the new Solvency II regime, firms will be required to set technical provisions for regulatory purposes in accordance with Articles 76 to 86 of the Solvency II Directive. In April 2014, the PRA published Supervisory Statement 5/14, which seeks to ensure that general insurers set an adequate level of technical provisions under the new basis required by Solvency II. Firms need to prepare for these new requirements and be able to demonstrate that they meet them by the implementation date of 1 January 2016. On 16 October 2014, in a Solvency II directors' update, the PRA set out how it will gain assurance that a firm's Solvency II balance sheet is adequate for all internal model and some large standard formula firms when assessing the solvency capital requirement calculations.

Firms are advised to speak to their supervisor in the first instance if they have any questions on the PRA's expectations of firms in the areas covered by the letter.

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